Institutional Investor's Alpha Magazine - April 2008 - (Page 69)

earlier: If the hedge fund industry didn’t take a seat at the table in Washington, somebody else would take it for them. Whonder, the former aide to Schumer, says it was a seminal moment for the managers: “Many of them started to get more involved after that.” Among those who have since stepped up is Eton Park founder Mindich, chairman of the hedge fund advisory committee to the President’s Working Group on Financial Markets, which was established in September 2007 by Treasury Secretary Paulson. Mindich is also one of a handful of hedge fund managers informally advising the presidential campaign of Illinois Senator Barack Obama. The clearest indicator today that hedge fund managers are reforming their ways in Washington is the changing of the guard at the MFA, including the appointment of Baker, who is said to understand capital markets. Instrumental in making that appointment and in forming an alliance between the MFA and Chanos’s group has been Vincent, Ospraie’s president and the MFA’s chairman. But Baker comes with some baggage: He was the congressman who introduced the Hedge Fund Disclosure Act. He is also a Republican facing an increasingly Democratic Congress. A further potential obstacle to his effectiveness is that ethics rules prevent him from lobbying during his ﬁrst year out of ofﬁce. Baker has been making the rounds of association members and regulators, however, and expects to use the power of the purse — raising hedge fund money through the MFA’s PAC — to help increase the industry’s inﬂuence. He expects to build coalitions of lawmakers from states with high concentrations of hedge funds, looking beyond the usual suspects in New York and Connecticut to candidates in states like California and Texas. But many ﬁrms are seeking to build their inﬂuence independent of the MFA. “You want to build a reputation as an honest broker,” says Chanos, who in addition to being a member of the PWG’s hedge fund panel is on good terms with several members of the congressional banking and ﬁnance committees. “The people who are best at inﬂuencing public policy are the people who do it themselves,” says Orin Kramer, a hedge fund manager and longtime Democratic operative and a onetime aide to then-president Jimmy Carter. When it comes to building relationships on the Hill, the credit market meltdown may turn out to be a blessing in disguise for hedge fund managers. It gives the industry a chance to show not only how it can be useful by providing the markets with liquidity, but how it can also be a source of market intelligence. Policymakers, after all, are struggling to make sense of the issue. Some hedge fund executives, like Mindich, D.E. Shaw’s Beck and Citadel’s Cooper, have been going out of their way to be available to advise lawmakers and their staff members. Ever since the fall of LTCM, many in Washington have viewed hedge funds darkly, wondering if too many of them aren’t run by trigger-happy cowboys whose bad behavior can bring down whole economies. But to the industry’s advantage, the current credit market crisis has happened because of risks taken by investment banks, not hedge funds. “It was some of the more highly regulated entities that were having problems,” Baker notes. This is part of why the ﬁrst test of hedge funds’ budding inﬂuence in Washington will probably be over taxation, not registration, though it is unlikely to occur until after November because — as everyone knows — tax increases are poison in an election year. (Registration can also be mindnumbingly complicated and carries less of a political punch.) Among the influential proponents of hedge fund tax reform is Representative Sander Levin, a Michigan Democrat who paints the issue as “a simple matter of tax fairness.” Currently, nonproﬁt investors such as pension funds, foundations and endowments must invest in offshore hedge funds to avoid having their — DARCY BRADBURY, returns taxed. One suggestion DIRECTOR OF EXTERNAL AFFAIRS, D.E. SHAW & CO. making the rounds is that hedge fund managers might want to look at striking a compromise on the carried-interest and deferred-compensation tax proposals in exchange for the removal of restrictions on nonproﬁt investors. It is the kind of “Let’s Make a Deal” approach that the hedge fund industry hasn’t tried in Washington and that Levin implies could work. “I am always open to a reasonable exchange of ideas on issues affecting the private equity and hedge fund industries,” says the congressman. “And we have tried to have that kind of exchange on both carried interest and on legislation to allow tax-exempt investors to invest in hedge funds without being forced offshore.” The MFA has been ofﬁcially neutral on the tax issues. Chanos has discreetly urged a compromise. But approximately ten MFA members, including some of the founding ﬁrms, last year hired a lobbyist to campaign against tax reform. So yet another ﬁght may be brewing. Even as the hedge fund industry warms up to Washington, some managers are having trouble shedding their traditional fondness for secrecy. It remains difﬁcult to draw out exactly which hedge fund ﬁrms are advocating precisely what reforms. And it remains to be seen whose agendas will win out. “Collectively, we came to realize that if you don’t tell your story, someone else is going to tell it for you.” On the Web Visit www.alphamagazine.com for a full list of hedge fund ﬁrms whose employees have contributed to the 2008 presidential campaigns. APRIL 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 69 http://www.alphamagazine.com

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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